Xtant Medical Q2 2024 Earnings Call Transcript

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August 9, 2024

There are 6 speakers on the call.

Operator

Welcome to the Xtant Medical Holdings, Inc. 2nd Quarter 2024 Conference Call. At this time, all participants are in a listen only mode. Later, we will conduct a question and answer session. I would now like to turn the call over to your host, Brett Maas, IR.

Operator

You may begin, sir.

Speaker 1

Thank you, operator. Joining me today is Sean Brown, President and Chief Executive Officer and Scott Neals, Chief Financial Officer. Today's call is being webcast and will be posted on the company's website for playback. During the course of this call, management may make certain forward looking statements regarding future events and the company's expected future performance. These forward looking statements reflect Xtant's current perspective on existing trends and information that can be identified by such words as expect, plan, will, may, anticipate, believe, should, intend and other words with similar meaning.

Speaker 1

Such forward looking statements are not guarantees of future performance and involve risks and uncertainties, including those noted in the Risk Factors section of the company's annual report on Form 10 ks filed with the SEC on April 1, 2024, and in subsequent SEC reports and press releases. Actual results may differ materially. The company's financial results, press release and today's discussion include certain non GAAP financial measures. Please refer to the non GAAP to GAAP reconciliations, which appear in our press release and are otherwise available on our website. Note that our Form 8 ks filed with our financial results press release provides a detailed narrative that describes the use of such measures.

Speaker 1

For the benefit of those who may be listening to the replay of this call, call was held and recorded on August 9 at approximately 9 am Eastern Time. The company declines any obligation to update its forward looking statements except as required by its applicable law.

Speaker 2

Now, I'd like to turn

Speaker 1

the call over to Sean Brown. Sean, the floor is yours.

Speaker 2

Thank you, Brett, and good morning, everyone. I'm pleased to announce another strong Xtant team. With 48% growth over prior year, we are solidly on pace to achieve our full year revenue guidance of $116,000,000 to $120,000,000 which we are reaffirming today. This range represents total annual revenue growth of approximately 27% to 31% compared to the full year 2023. From an organic growth perspective, which we define as revenue growth excluding contributions from products acquired during the previous 3 65 days for which there were no comparable sales, 2nd quarter revenue was flat compared to the prior year, mostly due to the planned surge line cannibalization of our X Spine hardware and significant OEM sales during Q2 2023.

Speaker 2

As our supply chain challenges abate and we introduce new products to the market, we continue to expect our organic growth to accelerate during the second half of twenty twenty four and reach double digits. From a profitability perspective, adjusted EBITDA for the 2nd quarter was $500,000 and marking our 5th consecutive quarter of positive adjusted EBITDA. In the Q2, we expanded our gross margin by 50 basis points compared to the prior year period and reduced our operating expenses as a percentage of revenue compared to Q1 2024. Our production is becoming more efficient and we continue to scale. We anticipate further improvements in adjusted EBITDA in Q3 2024 and beyond.

Speaker 2

As I have discussed in previous calls, we expect the first we expected the first half of this year to be challenging due to numerous supply chain issues. So we are pleased to have such a strong second quarter. We have worked through most of these issues that have impacted some of our fastest growing products. Additionally, we are closer to producing our own stem cells, which we expect will provide an uptick to both revenue and operating profit. I want to give a quick update on our acquisitions from last year.

Speaker 2

The acquired Surgi Line product lines are performing very well and strategically helping us replace specific aging Xtand hardware lines. This cannibalization was intended and a big part of the strategic rationale behind the deal. I am particularly pleased by how the top 20 distributors have grown 16.5% in revenue from when we acquired Surgeline in the Q3 of 2023. The Nanos IP and production acquisition will play a significant role in our future growth in new products addressing new verticals within our Biologics business. As we develop those new product lines, I will give more details about the product specifics, target markets and our go to market strategy.

Speaker 2

Overall, we are pleased with our progress in integrating each of these acquisitions and we continue to rationalize related expenses product lines. As a reminder, we have built our platform with 4 key pillars that we believe will drive sustainable long term growth. 1, new product introductions 2, distribution network expansion 3, adjacent market penetration and 4, strategic acquisitions. Starting with new products, like every healthy, robust organization, we are continually innovating with deep pipeline of new products. During the course of our turnaround, we expanded our biologics product offering from 2 categories to 5, which helped enhance our growth profile.

Speaker 2

Moreover, we are the only orthobiologics company that offers a complete line of orthobiologics, which include allograft, DBM, synthetics, viable bone matrix stem cells and growth factor. During the Q2, we released a 6th new category, amniotic membrane allografts for surgical applications and advanced wound care and we are already booking sales. Xtant previously sold a distributed product that another company made that focused on the surgical repair side of our business. This is currently a small product line for us, but with our far superior products, we believe we can profitably grow our Xtant branded product line as well as provide a fantastic solution as an OEM producer. Fiscal year 2024 is our year of self sustainability.

Speaker 2

In the second half of this year, we plan to roll out products that we produce to our own standards in a much more profitable way than relying on products from others where we do not control the supply chain. Also on the hardware side, we are finishing development and soft rollout of the Cortera posterior fixation system started by Surgelon. We are now in the process of completing that rollout, which we anticipate will be fully completed by Q4 of this year. The next pillar focuses on expanding our distribution network and contract access. Our platform offers more to more than 4.50 IDNs and GPOs that cover approximately 90% of all the beds in the U.

Speaker 2

S. In addition, our distribution network now includes more than 6.50 distributors. In years past, we focused on continuing to expand the total number of distributors by at least 10 new agents per quarter. Today, we plan to look for opportunistic distribution additions, but our primary focus will be increasing penetration into the distributors we already have. We have found that the more product lines that distributor sells of our products, the stickier they become as a distributor for Xtant Medical.

Speaker 2

Now with that said, we still added 15 new distributors this past quarter. So we are getting better penetration with our bigger distributors, while also adding new high potential distributors. Now turning to our 3rd pillar, leveraging adjacent markets. One goal for Xtant in the long term is to build products that serve other verticals beyond spine and orthopedics. Through our OEM manufacturing, we serve different verticals and learn about the dynamics of those specific markets with an eye on potentially expanding in places where we can have a significant impact.

Speaker 2

We have gained traction within the sports medicine, foot and ankle, trauma and reconstructive joint orthopedic markets. With the addition of our amniotic tissue products, we can now serve both the surgical repair and advanced chronic wound care markets. Our final pillar focuses on achieving growth through targeted acquisitions. By leveraging our growth platform for over of over 4 50 IDN agreements and 650 distributors selling our products nationally, we are targeting either undercapitalized or subscale companies. More specifically, similar to our acquisitions in 2023, we are targeting companies that either help complete our offering or provide us with additional scale.

Speaker 2

Our focus on acquisition targets is based on 3 characteristics. 1st, capabilities. We're looking at companies or technologies that give us greater capabilities, particularly in regenerative biologics. Additionally, we look at businesses that help complete Xtant's spine fixation and motion preservation offerings. 2nd, capacity, targets that can expand our long term biologics production demand.

Speaker 2

And then 3rd, cash flow, businesses that are profitable or can become profitable through cost or margin synergies. We believe that making sound, targeting the strategic acquisitions that fit within our strategic or stringent criteria will take us one step closer to achieving our long term goals. We believe our unique platform robust distribution network will allow future companies we acquire to be part of a fast growing company. Furthermore, we believe it will allow the entrepreneurs and other owners of these of those companies to win when they are purchased and then potentially win even bigger over time as Xtant continues to grow. Moving forward, we are focused on becoming operationally self sustaining by controlling our supply chain and becoming less reliant on production outside our control.

Speaker 2

We believe this self reliance will allow us to be a larger and more diverse producer of biologics. Moreover, producing our own products should dramatically improve our margin profile, coupled with an expanded product line that brings additional transformation or transformative treatment options to a large and growing patient population. Most importantly, we believe these actions will help us get to positive operating cash flow during the Q4 of 2024. Now I'd like to turn the call over to Scott, who will discuss our Q1

Speaker 3

Thank you, Sean, and good morning to everyone on the call. Total revenue for the Q2 of 2024 was $29,900,000 compared to $20,200,000 for the same period in 2023. The 48% increase is attributed primarily to product sales from the recently acquired surge line hardware and biologics business. Gross margin for the Q2 of 2024 was 62.1% compared to 61.6 percent for the same period in 2023. The increase was primarily attributable to greater scale and improved production efficiency, which is partially offset by increased charges for excess and obsolete inventory, non absorbed costs and sales mix.

Speaker 3

2nd quarter 2024 operating expenses were $21,500,000 compared to $13,900,000 in the same period a year ago. As a percentage of total revenue, operating expenses were 71.9% compared to 68.5% in the same period a year ago. These increases were primarily attributable to additional commission expense resulting from revenue growth, additional compensation expense related to additional headcount and additional stock based compensation. Sequentially, operating expenses declined 260 basis points from Q1 of 2024. General and administrative expenses were $7,700,000 for the 3 months ended June 30, 2024, compared to $5,000,000 for the same period in 2023.

Speaker 3

This increase is primarily attributable to increases in compensation expense, stock based compensation, professional service fees and hardware and software expenses. Sales and marketing expenses were $13,200,000 for the 3 months ending June 30, 2024 compared to $8,700,000 the same period in 2023. This increase is primarily due to higher commission expenses related to increased sales and additional compensation expenses associated with additional headcount. Research and development expenses were $600,000 for the 3 months ending June 30, 2024, an increase from $200,000 for the same period in 2023. The increase is primarily due to increased headcount related to our additional focus on new product introduction.

Speaker 3

Net loss in the Q2 of 2024 was $3,900,000 or $0.03 per share compared to a net loss of $2,200,000 or $0.02 per share in the comparable 2023 period. Net loss in the Q2 of 2024 was a sequential improvement of $500,000 from $4,400,000 in Q1 of 2024. Adjusted EBITDA for the Q2 of 2024 was $500,000 compared to $100,000 for the same period in 2023. As of June 30, 2024, we had $5,400,000 of cash, cash equivalents and restricted cash. Net accounts receivable was $21,200,000 inventory $40,500,000 $5,100,000 was available under our revolving credit facility.

Speaker 3

In addition, on August 7, 2024, we entered into an agreement for a $5,000,000 pipe an existing institutional investor to provide additional working capital as we transition towards positive operating cash flows. Operator, you may now open the line for questions.

Operator

And our first question comes from Ryan Zimmerman of BTIG. Please ask your question.

Speaker 4

Good morning.

Speaker 5

Can you

Speaker 4

guys hear me okay?

Speaker 2

Yes, I can hear you great. How are you today? Awesome.

Speaker 4

I'm good. I'm good. Thanks for taking our questions and appreciate and congrats on all the progress this quarter. Maybe you could start, Sean, with just a little color around kind of the mix of the revenue this quarter, kind of between orthobiologics and spinal implants and how you see that playing out over the balance of the year? It seems like a lot of the surgical line hardware helped in the quarter, but just appreciate any color there.

Speaker 4

Then I have a follow-up on guidance.

Speaker 2

Okay. Yes, sure. So when I think about it now, I'll take it from a high level perspective and Scott, I don't know if you want to add any color with the specifics of the percentages of each. But from a high level perspective, yes, the surge line hardware has been a real nice helper. And it is, as I mentioned, this is something that we're really to take over some of our older X Spine hardware, the Surgeonly product line, which is a very good product line.

Speaker 2

And so it's one that's helping us replace. So that whole cannibalization was something that we wanted to build in. And so as we think about what's going to happen in the second half of this year, you're going to see 2 things that will take place. You're going to see an increase of our own self produced things, like I said, our amnio, some of our stem cell stuff that will be coming out in the second half this year. All of that will help drive more our biologics sales.

Speaker 2

But concurrently, we have a nice, Corteva product line that's going to be really rolled out in full. The MIS portion of this, we have the open already with us today, but the MIS portion will be rolled out during NASS. And so we feel that in the Q4, we'll really start to see a nice uptick when it comes to the hardware side of things. So overall, I think we got a nice balance of growth. But I think, yes, just over the course of time, I just also think that our biologics business based on the strength of where that is, will start to become even more prominent.

Speaker 4

Okay. That's very helpful. And then with the guidance, you beat by a little bit, but obviously not flowing that through to the guidance very much reiterating guys. And just help us think through the pacing for the balance of the year and how to think about Q3 versus Q4. It seems like traditionally you'll get nice seasonal step up in the Q4.

Speaker 4

Just want to make sure we're clear on that.

Speaker 2

Sure. So we will see an uptick in the Q3 from certainly the Q2, which is something that typically you wouldn't see, but we do feel good about what's happening within the business overall, especially the ramp up that's starting to take place with our stem cell business, where we really just about early second quarter, we finally got fully stocked in that. We haven't been fully stocked in probably 2 years. And so that has taken a little longer than we expected, but we are starting to see it really start to take off here in the 3rd and we expect also in the 4th quarter. So we do think that as we think about the pacing, 3rd quarter should be improved, 4th quarter should be strong.

Speaker 4

Okay. Just want to be clear that 3rd quarter higher than 2nd quarter and maybe not as much of a step up in 4th quarter relative to 3rd, but still kind of continuing sequentially to grow?

Speaker 5

Yes.

Speaker 4

Okay, very helpful. And then just last one for me, maybe for Scott, just looking at the gross margins, they've held steady this first half of the year. Talk to me about kind of where you think those margins will go, particularly as you bring those stem cells back in house, you add the amniotics, I would assume both carry pretty good margin. So just talk to me about kind of where you see that transitioning?

Speaker 3

Sure. Going back to Q1, I think what we sort of laid out as the progression on that was an expectation that those would remain relatively constant in Q2 and Q3 with an uptick, a fairly significant uptick occurring in Q4 as we started really leaning into internally produced stem cell. I think the one change I would come back on this go around would be that I look back at our inventory in our stem cell in terms of source stem cells. And I think we'll continue selling through that for the remainder of Q4. So I don't think we'll see as dramatic of an uptick in gross margins in Q4.

Speaker 3

Although I do expect to see some, but I think we'll fully realize that in Q1 of 2025. So I think it'll be more consistent in Q3 and Q4 as we round out the year.

Speaker 4

Thank you, Scott. Yes, Scott.

Operator

Our next question comes from Chase Knickerbocker of Craig Hallum Capital. Your line is open.

Speaker 2

Good morning, guys. Good morning, Chase.

Speaker 5

Good morning, guys. Thanks for taking the questions and congrats on the good progress here. Maybe just starting, Sean, on the amniotic side, kind of give us an update as you've kind of launched that product now, kind of how you see the bigger opportunity for Xtant being kind of your direct distribution or kind of those OEM agreements, particularly may be in wound care, it's a dynamic market. But I'd love to get you just get your updated thoughts there on kind of what the largest opportunity is for Xtant?

Speaker 2

Yes. No question about it. The largest opportunity for us will be what we do on the OEM side. And quite frankly, with the agreements that we already have in place, we can't make enough of it, quite frankly. So the biggest issue we have is sourcing the amniotic tissue itself.

Speaker 2

So that's job 1, so getting more in, so because there is quite a bit of OEM opportunity. And then we do see that this product line for us already is like $1,000,000 product line. And what's interesting about it, it's only like 4 different doctors who use this. And so it's really used as a protective barrier. And so as we have gotten it further out to our own sales force, we're finding more and more of our distribution network that sells a little bit here, a little bit there and here we have a really great product and we can afford much, much better margins than we have in the past or at least I should say, much better commissions than we have in the past.

Speaker 2

And so this may be a product line that will surprise us and we'll see what it is, but we know right away as a $1,000,000 product line where we are making say 50% margins, we're now making to 90% margins on that same product line. So it has a nice drop through. And on the OEM side, it's a terrific contribution margin drop through. So maybe not so much on the gross margin side, but definitely on the contribution side.

Speaker 5

Got it. And to kind of maybe talk about what you're doing on the supply side to source more placentas? I know, it kind of takes some while to kind of build those relationships. Maybe just speak to kind of how you're trying to up production there?

Speaker 2

Well, the good news is that, our relatively new COO, Mark Shallenberger, had come from that side. He'd worked with a competitor a couple of years back that had grown very, very fast in this Amneal world. And so Mark certainly has relationships. It's now just getting more of those agreements signed. And so we get more coming through.

Speaker 2

But it's one of the other things too about Mark Mark has just an impeccable reputation within that world. And that matters because there's some guys out there that aren't necessarily so have such terrific reputations. And so I think through that, we will be able to get more and more of those placenta donors in. And so yes, so that's literally right now is our most limiting factor.

Speaker 5

Got it. And then Scott, kind of answered this partially in his last answer. But on the stem cell side, kind of how should we think about supply, that you guys will have available kind of soon after the launch of that product? It sounds like it's going to be kind of a phase out of the sourced product. But kind of maybe just talk to how quick you think you can kind of get inventory there to meet all of the VBM demand that you have today and then potentially unlock demand that your supply constrained from addressing today?

Speaker 2

I'll jump in and Scott if you want to add some color to this, that'd be great. So two things, yes, we will absolutely be able to manage our own demand, which again is terrific because now we're selling a product that again in the high 80s, low 90% margin product versus the 60% margin product that we source today. So that is absolutely fantastic. Now where we see also some really terrific opportunities is what's taking place on the OEM side. And so we're very, very because we were in this position.

Speaker 2

We don't want to necessarily bring on anybody that we can't be fully to be able to meet all of their needs. And so today, we have 3 groups that are signed up as we speak, that are patiently waiting as we roll out our new product line here. But we're we the volumes that they're projecting for us right now are ones that we can manage and they're ones that's on top of 1st and foremost, we have to feed ourselves and then we're going to take care of the OEM opportunities. But we're not going to overstretch our capabilities. But there is quite frankly, quite a bit of opportunity that's out there.

Speaker 2

So as we get better at this and we are able to become more efficient with our production, we will be looking to expand that OEM opportunity too.

Speaker 5

Got it. And is it going to take a little bit of time to kind of ramp up that production? Or again, just kind of how soon after the launch of the product would you expect to be able to kind of fulfill your demand and then start to chip away at this OEM opportunity? Is it fairly short? Is it a couple of quarters, etcetera?

Speaker 2

Yes. Great question. And as Scott had mentioned, we have happily, we now have as much stem cells as we could sell throughout the year, which is both the good and the bad thing. So for our own product line, we're going to be good. So right now, our initial focus will be to start fulfilling those OEM opportunities.

Speaker 2

And so we think that by doing that and just again, the ramp up of any kind of production over the course of literally the next 3 or 4 months will be in really terrific shape come really Q1 of 2025 when we're actually producing our own products as well. So this year, what you're going to see from us and this is a little bit of why Scott was saying that our margins may not be as high because we won't be selling our gross margins won't be as high because we won't be selling as much of our own stem cell products, but we will be selling a hell of a lot of stem cell products to OEM guys. And so that again, the contribution margin is really nice because there's not a commission tied to that. And so that's something at least from our side, where we don't get it on the gross side, we will get it on the overall profit side.

Speaker 5

Yes. Okay. That makes a lot more sense. And then Ryan touched on it briefly. I just want to put another kind of finer point on it.

Speaker 5

I respect I hear you on the organic growth number, but kind of looking at the hardware number here, it seems pretty clear that kind of that cannibalization that you're talking about is hiding some pretty good growth that would otherwise probably be organic. So can you maybe just talk to what kind of in the hardware bucket is really working and you're really encouraged by?

Speaker 2

Yes. So when you look at here's a great example. So when you were to look at any of our competitors who sell spine fixation, most of them have their pedicle screw systems will sell anywhere from 40% to as much as 50% of their overall revenue. The old X Spine business was less than 13%. So it was a really, really, really dated line.

Speaker 2

So the pedicle screw systems that we've brought over from Surgi Line right away has helped us considerably because that is a that can be a very impactful product line. Then when you throw in Cordera on top of that and the kind of growth that we're starting to see from that, this past quarter, we've had more users. The month of June was our highest amount of revenue that we've had in that particular product line, and it only continues to climb. And so then as we add the MIS part to this in September or late September, we really feel that the spine fixation business is going to profitably contribute to our business and to our growth in a nice way.

Speaker 5

Got it. And then just last one for Scott. Great to hear on the expectation for positive operating cash flows in Q4. Maybe just speak to kind of expectations kind of from there. Is that kind of sustainable cash flow breakeven?

Speaker 5

How are you thinking about that as we kind of exit the year?

Speaker 3

I would say that I don't expect that to be the case in Q1 simply because there's a comp payout in Q1, but I would suspect that thereafter that that would sort of be the expectation as we look at cash flows from operations.

Speaker 5

Great. And congrats again, guys. Thank you. Great.

Speaker 4

Thanks,

Operator

And seeing no further questions, I'll turn the call back over to our host.

Speaker 2

Great. Thank you, operator. We made great progress in the second quarter and first half of twenty twenty four. As we progress through the remainder of the year, we believe there are 3 key drivers for Xtant to become a self sustaining company. 1, build our own biologics.

Speaker 2

This is a big quarter for our internal development team. The more we produce of our own highly profitable biologics, the less we'll rely on other manufacturers' supply chains. We believe this one step alone will help us get to positive operating cash flow in Q4. 2nd thing, optimize the integration of the businesses we bought last year. We see great growth opportunities and more opportunities to leverage cost.

Speaker 2

And then 3, continue to drive the 4 pillars of growth. This formula has worked for Xtant and we plan to continue to drive growth through these pillars. In closing, I want to reiterate our mission of honoring the gift of donation by allowing our patients to live as full and complete a life as possible. I appreciate the dedication of our valuable employees. Without them, our success and achievements would not be possible.

Speaker 2

Thank you for joining us today and for your continued support.

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